Connecticut DRS Tax Audit Response Package

CONNECTICUT DRS AUDIT RESPONSE PACKAGE

Submitted to the Department of Revenue Services — Audit Division

TABLE OF CONTENTS

1. Engagement Header
2. Cover Letter to Auditor
3. Information Document Request (IDR) Response Index
4. Position Statement
5. Records Retention and Production Schedule
6. Privilege and Confidentiality Log
7. Penalty Abatement Request
8. Reservations of Rights
9. Verification and Signature
10. Connecticut Practice Notes
11. Sources and References

1. ENGAGEMENT HEADER

2. COVER LETTER TO AUDITOR

[DATE]

VIA [CERTIFIED MAIL / myconneCT / EMAIL / HAND DELIVERY]

[AUDITOR NAME], Tax Examiner

Connecticut Department of Revenue Services

Audit Division — [OFFICE]

450 Columbus Boulevard, Suite 1

Hartford, CT 06103-1837

Re: [TAXPAYER NAME] — Audit of [TAX TYPE] for Period(s) [___]; CT Tax Reg. No. [____]; Audit No. [____]

Dear Auditor [LAST NAME]:

This package responds to the Information Document Request(s) ("IDR(s)") issued by the Department of Revenue Services ("DRS") on [DATE] in connection with the above-referenced audit. Enclosed please find:

• (a) The IDR Response Index (Section 3) cross-referencing each IDR item to the produced documents and Bates ranges;
• (b) Taxpayer's Position Statement (Section 4) addressing the legal and factual issues identified to date;
• (c) A Privilege and Confidentiality Log (Section 6) for documents withheld;
• (d) A request for waiver of any proposed penalties under Conn. Gen. Stat. § 12-735(c) (Section 7); and
• (e) A Reservation of Rights (Section 8).

Taxpayer remains committed to cooperating with this examination, providing relevant non-privileged information, and resolving any disputed issues at the lowest possible level.

Please direct all future correspondence and IDRs to the undersigned. A duly executed Form LGL-001 (Power of Attorney) is on file with DRS.

Respectfully submitted,

[________________________________]

[ATTORNEY NAME], Conn. Juris No. [####]

Counsel for [TAXPAYER]

3. INFORMATION DOCUMENT REQUEST (IDR) RESPONSE INDEX

3.1. Objections and Limitations

3.1.1. Taxpayer objects to any IDR to the extent it seeks information that is (a) protected by the attorney-client privilege; (b) constitutes attorney work product; (c) was prepared in anticipation of litigation; (d) is protected by Conn. Gen. Stat. § 20-281a accountant confidentiality (subject to Section 6 below); or (e) is outside the scope of the audit period.

3.1.2. Taxpayer objects to any IDR to the extent it is unduly burdensome, vague, ambiguous, or seeks information not in Taxpayer's possession, custody, or control.

3.1.3. Production of any document is without prejudice to, and does not waive, any privilege or objection. Taxpayer reserves the right to claw back inadvertently produced privileged materials.

4. POSITION STATEMENT

4.1. Issue Presented

[Concise statement of the audit issue — e.g., "Whether sales of cloud-based software services to Connecticut customers constitute taxable 'computer and data processing services' under Conn. Gen. Stat. § 12-407(a)(37)(A) for the periods ending [___]."]

4.2. Short Answer

[Concise statement of Taxpayer's position — e.g., "No. The services are non-taxable software-as-a-service custom solutions falling outside § 12-407(a)(37)(A) and within the exemption recognized by DRS Ruling [___]."]

4.3. Statement of Facts

4.3.1. [Numbered factual recitation. Cite to produced documents by Bates range.]

4.3.2. [Continue.]

4.4. Applicable Law

4.4.1. [Statutory provisions and regulations applicable to the issue — e.g., Conn. Gen. Stat. §§ 12-407, 12-408; Conn. Agencies Regs. § 12-426-27.]

4.4.2. [Relevant DRS guidance — Policy Statements, Informational Publications, Rulings, OCG memoranda.]

4.4.3. [Relevant case law — e.g., decisions of the CT Superior Court Tax Session, CT Appellate Court, CT Supreme Court.]

4.5. Argument and Application

4.5.1. [Apply law to facts. Cite documents.]

4.5.2. [Anticipate counter-arguments and address them.]

4.6. Conclusion

For the foregoing reasons, no additional tax, interest, or penalty is owed for the periods at issue. To the extent the auditor proposes adjustments, Taxpayer respectfully requests a closing conference and the issuance of any proposed assessment in writing in compliance with Conn. Gen. Stat. § 12-729 (or the parallel section for the tax type at issue) so that protest rights may be timely exercised.

5. RECORDS RETENTION AND PRODUCTION SCHEDULE

5.1. Statute of Limitations Framework

5.2. Records to Preserve

Taxpayer has implemented a litigation hold and shall preserve, through the conclusion of all administrative and judicial proceedings (and any appeals therefrom), the following categories of records:

• ☐ Filed Connecticut returns and supporting workpapers (paper and electronic)
• ☐ Federal returns and federal RARs / closing agreements
• ☐ General ledger, trial balance, and accounting system data
• ☐ Bank statements, deposit records, and merchant processor data
• ☐ Sales invoices, exemption certificates (Forms CERT-100, CERT-119, etc.), and resale certificates
• ☐ Payroll records, W-2/1099 forms, and apportionment data
• ☐ Contracts and agreements with customers, vendors, and affiliates
• ☐ Email and internal communications relating to the audit issues
• ☐ Audit correspondence and all DRS notices
• ☐ Engagement letters with accountants and attorneys

5.3. Production Format

5.3.1. Electronically stored information ("ESI") will be produced in [native / TIFF + load file / PDF] format with appropriate metadata.

5.3.2. Paper documents are produced as scanned PDFs with sequential Bates numbering.

5.3.3. Each production will be accompanied by a transmittal letter and updated production index.

6. PRIVILEGE AND CONFIDENTIALITY LOG

The following documents responsive to the IDRs are withheld in whole or in part on the bases identified below:

6.1. Note Concerning Connecticut Accountant-Client Confidentiality

Conn. Gen. Stat. § 20-281a et seq. and Chapter 389 of the General Statutes impose a statutory duty of confidentiality on Connecticut-licensed certified public accountants regarding client information. This duty is a professional-conduct obligation enforceable by the State Board of Accountancy; it is not a generally applicable evidentiary privilege equivalent to the attorney-client privilege and will not, standing alone, defeat a properly issued DRS administrative summons. Communications protected under federal accountant-client privilege (26 U.S.C. § 7525) are likewise of limited application in state tax controversies. Where genuine privilege protection is required, communications have been routed through counsel under a Kovel engagement.

7. PENALTY ABATEMENT REQUEST

7.1. Statutory Basis

Pursuant to Conn. Gen. Stat. § 12-735(c), the Commissioner may waive, in whole or in part, any penalty otherwise imposed under §§ 12-735(a) and (b) where the failure to file or pay was due to reasonable cause and was not the result of negligence or intentional disregard of the law.

7.2. Reasonable Cause Showing

Taxpayer respectfully requests abatement of any proposed late-filing, late-payment, or negligence penalty for the following reasons (check all that apply and document):

• ☐ Reliance on competent professional advice with full disclosure of relevant facts
• ☐ Serious illness, death, or unavoidable absence
• ☐ Casualty, disaster, or system outage outside Taxpayer's control
• ☐ Records destroyed by fire, flood, or other casualty
• ☐ Erroneous DRS guidance or written advice
• ☐ Genuine ambiguity or first-impression interpretation of statute
• ☐ First-time noncompliance with no prior history of penalties
• ☐ Other: [DESCRIBE]

7.3. Procedure

Taxpayer will file Form DRS-PW (Request for Waiver of Civil Penalty) in conformity with current DRS procedures, accompanied by an affidavit of reasonable cause and supporting documentation. A request for waiver must be filed within one (1) year of the penalty notification or one (1) year after filing the underlying return, whichever is later.

8. RESERVATIONS OF RIGHTS

8.1. Taxpayer reserves all administrative and judicial rights, including:

• The right to file a written protest with the DRS Appellate Division within 60 days of any Notice of Assessment under § 12-729 (income tax), § 12-418 (sales/use tax), or parallel provisions for other tax types;
• The right to appeal an adverse Notice of Determination to the Superior Court for the Judicial District of New Britain (Tax Session) within 30 days under § 12-730 (income), § 12-422 (sales/use), or parallel sections;
• The right to file a refund claim under § 12-732 (income), § 12-425 (sales/use), or parallel provisions;
• The right to assert all constitutional defenses (Due Process, Commerce Clause, Equal Protection, Article First, Sections 1, 8, 10, and 20 of the Connecticut Constitution); and
• The right to seek penalty abatement, offer in compromise, and installment arrangements as authorized by Conn. Gen. Stat. § 12-2d, § 12-39ff, and DRS policy.

8.2. No Waiver. Nothing in this submission constitutes an admission of liability, a waiver of any privilege, or a concession of any factual or legal issue not expressly conceded in writing.

8.3. Statute of Limitations. Taxpayer does not consent to extend the period of assessment under Conn. Gen. Stat. § 12-733 unless and until a written extension on Form LGL-002 is executed by the duly authorized representative.

9. VERIFICATION AND SIGNATURE

I, [NAME], declare under the penalties of false statement (Conn. Gen. Stat. § 53a-157b) that I am the [Taxpayer / authorized officer of Taxpayer / authorized representative under Form LGL-001], that I have read the foregoing submission, and that the statements herein are true and correct to the best of my knowledge, information, and belief.

Date: [__/__/____]

[________________________________]

[NAME], [TITLE]

Counsel for Taxpayer:

[LAW FIRM NAME]

By: [________________________________]

[ATTORNEY NAME], Conn. Juris No. [####]

[STREET ADDRESS] | [CITY, CT ZIP]

Telephone: [NUMBER] | Email: [EMAIL]

10. CONNECTICUT PRACTICE NOTES

• Audit opening — set the tone. Connecticut audits typically begin with an entrance conference and an initial IDR. Insist on written communication, calendar all deadlines, and confirm the scope (tax types, periods, focus issues) in writing. Avoid informal commitments by client personnel that bind the audit position.
• Statute extensions (Form LGL-002). A consent to extend often appears late in the audit. Evaluate whether refusing to sign forces DRS to issue a protective assessment (which may be advantageous because the burden then shifts to administrative protest). Never sign a "blank check" extension; specify tax types, periods, and a sunset date.
• Federal RAR conformity. Conn. Gen. Stat. § 12-727(b) requires reporting any final federal change within 90 days. Failure to report keeps the assessment statute open. If an IRS audit is pending, consider filing a protective Connecticut refund claim under § 12-732.
• Sales-tax sampling. DRS sales/use audits often use statistical or block sampling. Insist on a written sampling agreement, the right to review and challenge the sample, and the right to "reverse audit" for unrecovered exemptions. Sampling errors are a common source of overstatement.
• myconneCT. Many audit communications now route through the myconneCT portal. Ensure the portal account is monitored daily during an open audit and that secure messages are downloaded promptly. Notices issued through the portal are deemed "mailed" for purposes of triggering protest deadlines.
• Kovel engagements. Because Conn. Gen. Stat. § 20-281a confers only a regulatory confidentiality duty and not an evidentiary privilege, route sensitive accounting analysis through counsel under a Kovel arrangement. Document the engagement clearly.
• Closing conference. Demand a closing conference before the auditor issues a Notice of Proposed Assessment. This is the last and best opportunity to resolve issues at the agent level. Bring a written agenda.
• Records retention. Taxpayers must keep records for a minimum of three years (six years for sales/use tax under Conn. Gen. Stat. § 12-426(a)). Litigation holds should extend the period through resolution of all proceedings.
• Penalty waiver. First-time, isolated noncompliance is often viewed favorably. Reasonable cause is never presumed and must be supported by evidence. Reasonable cause requests do not abate interest under § 12-735(b).
• Offer in compromise. Where the audit reveals legitimate doubt as to liability or collectability, a Form DRS-OIC offer in compromise may be filed under Conn. Gen. Stat. § 12-2d.
• Privilege claims must be specific. Generic "privileged" tags will be rejected. Provide a complete log identifying author, recipient, date, subject, and basis. Failure to log can waive the privilege.

11. SOURCES AND REFERENCES

• Conn. Gen. Stat. Title 12 (Taxation) — https://www.cga.ct.gov/current/pub/title_12.htm
• Conn. Gen. Stat. § 12-733 (Statute of limitations) — https://law.justia.com/codes/connecticut/title-12/chapter-229/section-12-733/
• Conn. Gen. Stat. § 12-735 (Penalties; waiver) — https://law.justia.com/codes/connecticut/title-12/chapter-229/section-12-735/
• Conn. Gen. Stat. § 12-727 (Federal change reporting) — https://law.justia.com/codes/connecticut/title-12/chapter-229/section-12-727/
• Conn. Gen. Stat. Ch. 389 (Public Accountants — § 20-281a et seq.) — https://www.cga.ct.gov/current/pub/chap_389.htm
• DRS Policy Statement PS 2007(2) — Your Rights as a Connecticut Taxpayer — https://portal.ct.gov/drs/publications/policy-statements/2007/ps-20072-your-rights-as-a-connecticut-taxpayer
• DRS Policy Statement PS 2019(3) — Penalty Waiver Procedures — https://portal.ct.gov/-/media/drs/publications/pubsps/2019/ps-2019(3).pdf
• DRS Policy Statement PS 2015(4) — Interest on Penalty Waivers — https://portal.ct.gov/-/media/DRS/Publications/pubsps/2015/PS20154pdf.pdf
• DRS Penalty Waiver, OIC, Protest Portal — https://portal.ct.gov/drs/myconnect/penalty-waiver-request-and-offer-of-compromise
• Form DRS-PW (Request for Waiver of Civil Penalty) — https://portal.ct.gov/drs
• Form LGL-001 (Power of Attorney) — https://portal.ct.gov/drs
• Form LGL-002 (Consent to Extend Statute of Limitations) — https://portal.ct.gov/drs
• United States v. Kovel, 296 F.2d 918 (2d Cir. 1961) (counsel-led accountant privilege)
• 26 U.S.C. § 7525 (Federal accountant-client privilege; limited to non-criminal, non-tax-shelter matters)

Disclaimer: This template is provided for informational purposes only and does not constitute legal advice. An attorney licensed in Connecticut must review and customize this document before filing. Laws, regulations, and DRS procedures change frequently; verify all authorities before use.